Aurcana Corporation – Silver Producer On Its Way to Greatness

Ticker Symbol – AUN.V (Canada), AUNFF.PK (US)

While governments around the world are printing fiat money, investors are buying gold and silver to protect the purchasing power of their own wealth. However, while the prices of gold and silver have increased significantly, gold and silver stocks have not responded in the same fashion. Why? One explanation is that bullion investors are not the same investors as gold and silver equity investors. Another explanation is that gold and silver are in a bubble and equity investors simply do not believe that these “high” metal prices are sustainable.

With that being said, something interesting is starting to happen. Investors who have never invested in gold and silver equities before are starting to pay attention. They are realizing that the mining stocks have lagged so much that even if gold and silver prices fall significantly, these equities are still cheap.

Aurcana Corporation, a silver producer, is a perfect example. Today, the company has a market cap of $255 million (Fully diluted = $317 million – $62 million cash to the treasury = $255 million) and is on track to produce 6 million silver equivalent ounces at a cash cost of approximately $8 per ounce. Even if the price of silver declined to $20 per ounce, the stock will be trading at a market cap to forward cash flow multiple of 3.54. However, if the price of silver stays where it is today or increases, this multiple will be much more appealing.

Scenario 1: Silver Price = $20 per ounce

Cash flow from mining operations = 6,000,000 ounces x ($20 – $8) = $72,000,000

Multiple = $255,000,000/$72,000,000 = 3.54

Scenario 2: Silver Price = $30 per ounce

Cash flow from mining operations = 6,000,000 ounces x ($30 – $8) = $132,000,000

Multiple = $255,000,000/$132,000,000 = 1.93

Scenario 3: Silver Price = $40 per ounce (Silver Price Just a Few Days Ago)

Cash flow from mining operations = 6,000,000 ounces x ($40 – $8) = $192,000,000

Multiple = $255,000,000/$192,000,000 = 1.33

Scenario 4: Silver Price = $60 per ounce

Cash flow from mining operations = 6,000,000 ounces x ($60 – $8) = $312,000,000

Multiple = $255,000,000/$312,000,000 = 0.81

The Company’s Business

Aurcana Corporation is a Canadian junior mining company listed on the TSX Venture Exchange, symbol AUN and US Pink Sheets, symbol AUNFF. According to the most recent conference call, the company is in the process of getting a listing on a major TSX Exchange. This should be completed by the end of the year. Also, the management plans to list the company on AMEX, but this will not happen before the stock price reaches $2 per share, which is the exchange’s requirement.

Second Quarter 2011 Conference Call

The principal business of the company is the acquisition, exploration, production, and development of mineral properties, primarily silver-copper-zinc-lead mines. Since 2007, the company has been operating La Negra Mine in which it holds a 92 percent interest. La Negra Mine is in the state of Queretaro, Mexico. In addition, in 2008, the company purchased a 100 percent interest in Shafter Mine in Texas, USA.

Source: Aurcana Investors Presentation

La Negra Mine

The La Negra silver-copper-lead-zinc mine is located in the state of Queretaro, Mexico. The mine was discovered and developed by Industriales Penoles S.A. de C.V. and it was in production from 1970 until 2000. Historically, it produced 36 million ounces of silver, 323 million pounds of zinc, 70 million pounds of copper, and 161 million pounds of lead. Aurcana acquired La Negra Mine in 2006. Annualized production starting in 2011 is estimated to be 2 million silver equivalent ounces.

Shafter Mine

Shafter Mine is a silver mine in Presidio County, Southwest Texas. From the late 1800s to 1942, it produced more than 35 million ounces of silver. Currently, this mine is not producing any silver, but the company started construction in December 2010 and the mine should be put back into production by May 2012. Once put into production, this mine will quadruple the company’s silver production.


As you can see in the following illustration, Aurcana was not doing well in 2008, but was recently turned around by Lenic Rodriguez, the company’s CEO.

Source: Aurcana Investors Presentation

In 2008, under the previous management, Aurcana was not able to operate profitably. The company was on the brink of bankruptcy. The board of directors was dissatisfied, fired the previous CEO and asked Lenic Rodriguez, who at that time was one of Aurcana’s board members, to turn the company around.

Since he took over on May 19, 2009, positive things have started to happen as is evident by the results in 2009 and 2010. The company became profitable while continuing to increase production. He replaced some members of the management team, expanded La Negra Mine’s mill capacity from 1,000 tonnes per day to 1,500 tonnes per day, and transformed La Negra Mine from a money-losing operation into a cash cow.

What is Next?

Now that Rodriguez has turned the company around, he is not even close to being done. His next goal is to increase the mill capacity at La Negra Mine from 1,500 tonnes per day to 2,000 tonnes per day by early 2012. This should increase production from 2 million to 2.6 million of silver equivalent ounces at La Negra Mine.

While this 33 percent increase in production is excellent, it pales in comparison to what is about to happen to the company’s overall production once Rodriguez and his team put Shafter Mine into production by May 2012. Aurcana will then be producing 5 million silver ounces at a cash cost of $7.60 per ounce. With the copper, zinc, and lead from La Negra Mine taken into account and converted into silver equivalent ounces, the total production will equate to 6 million silver equivalent ounces. Assuming the price of silver is $30 per ounce, the company will generate more than $100 million in cash flow. However, if the price of silver returns to $40 per ounce, which was the price just a few days ago before the gold and silver meltdown, the cash flow will be nearly $200 million per year. Let’s not forget that currently, the market cap is $255 million.

As a result of Shafter Mine being put into production, Aurcana will become a mid-tier silver producer. To realize just how monumental this will be, it is helpful to put things in perspective. Shafter Mine’s production alone will increase US silver production by 10 percent., the United States will jump from being the number 8 silver producer in the world to number 6, and Shafter Mine will become the 14th largest silver mine in the world:

Source: Aurcana Investors Presentation

Precious Metals Summit

On September 15, 2011, Aurcana presented at Precious Metals Summit. The following is the link to the audio file. It also includes the most recent investor presentation.


The quality of any company’s management is always of critical importance, but is especially important in the mining world. The following are some of Lenic Rodriguez’s accomplishments with Aurcana:

  • He took over in May 2009, and by the end of 2009, the company turned EBITDA positive
  • He needed to raise money to put Shafter Mine into production and he did so by raising $85 million, which is remarkable considering that the market cap was $30 million at that time
  • After he raised the money, he immediately started construction of Shafter Mine
  • Before he became CEO, Aurcana had a silver contract with Silver Wheaton that he managed to pay off for about $25 million even though its value was $65 million at that time
  • He wanted Dr. Peter Megaw, one of the top three geologists in North America, to be part of Aurcana and he persisted until Megaw finally agreed to join them
  • He said he was going to increase La Negra Mine’s mill capacity from 1,000 tonnes per day to 1,500 tonnes per day, and he completed it on time and under budget

Now, he is promising to increase capacity at La Negra Mine again and put Shafter Mine into production to generate between $100 and $200 million of cash flow per year.  He has delivered time and time again, and I have confidence that he will do it this time.

In the following interview, Rodriguez talks about the expansion of La Negra Mine, Aurcana’s turnaround, the new management, and Shafter Mine.

In the following interview, Rodriguez talks about the private placement that closed December 2010. He raised $85 million even though the market cap at that time was $25 to $30 million. Sprott Asset Management and Fidelity Investments were the participants. Rodriguez also talks about the silver stream agreement with Silver Wheaton. Again, he talks more about Shafter Mine and how Aurcana will cash flow north of $100 million per year.

The following video summarizes the investment case for Aurcana Corporation. It was featured on BTV – Business Television. Dr. Peter Megaw talks about how $25 to $30 million was spent by other people on Shafter Mine before Aurcana acquired it.

In the following radio interview (Segment 1), Dr. Peter Magaw and Lenic Rodriguez discuss the reopening of Aurcana’s Shafter Mine in Texas. Rodriguez talks about how he met Dr. Peter Magaw. Magaw describes the tremendous exploration potential at Aurcana. Rodriguez talks about how Aurcana acquired Shafter Mine.

In the following radio interview (Segment 6), Al Korelin and Roger Wiegand discuss Aurcana, which Trader Rog follows in his newsletter. Korelin talks about how Lenic Rodriguez gets things done.

Why is the Company So Cheap?

While many of the mining companies are cheap in relation to the prices of gold and silver, Aurcana is particularly cheap. One explanation is that the company was recently turned around and the full potential is not being shown in the financials yet. As time passes, this will slowly change in the company’s income statements. Second, Aurcana is a junior mining company, and many investors have never heard of it. Third, Sprott Asset Management is suing Aurcana. Yes, you read that correctly. Even though Sprott owns a big portion of Aurcana, he is suing the company. Sprott claims that Aurcana backed out of an agreement to borrow $25 million and failed to pay a termination fee equal to 1.56 million ounces of silver. Aurcana claims that it never signed such an agreement. Aurcana asked the court to have the case dismissed. The next court date is scheduled on October 19, 2011. The worst case scenario is if Aurcana is forced to take a $25 million loan and repay it with 1.56 million ounces of silver. Although this outcome is possible, it would not have a devastating effect on Aurcana especially when it starts producing 6 million ounces of silver per year.


Aurcana’s future will depend on the management’s execution and the price of silver. Even though the stock of the company will still be cheap if the price of silver decreases significantly, it probably does not make any sense to invest in it unless you believe that the price of silver will increase or at least stay at the current level. With that being said, the upside potential in Aurcana is tremendous and the downside is fairly limited. However, in the short term, this does not mean that the market won’t sell it off. If there are enough fools trying to sell the stock at the same time, the price will decline no matter what the underlying business is doing. This kind of behavior is evident in the stock’s price action over the last few days which allowed me to acquire all the shares I wanted at these depressed priced.

Disclosure: I, or persons whose accounts I manage, own shares of Aurcana Corporation. This report is not a solicitation to buy or sell securities. Neither Mariusz Skonieczny nor Classic Value Investors, LLC, is responsible for any losses resulting from purchasing or disposing shares of Aurcana Corporation. You are advised to consult your financial advisor or conduct the due diligence yourself.

30 Comments to Aurcana Corporation – Silver Producer On Its Way to Greatness

  1. September 28, 2011 at 3:52 am | Permalink

    What about the demand side of the equation? What is happening to the demand for silver? It is not stored like gold.

  2. aagold's Gravatar aagold
    September 28, 2011 at 8:03 am | Permalink

    Interesting idea, but I’m surprised at something. In our previous discussion on YNGFF, you agreed that “resources are important and I probably should have included them in my original analysis”. But in this new writeup, once again there’s absolutely no discussion of reserves/resources. I don’t get it – why is this not worthy of even a brief mention? Wouldn’t that play a large role in determining what Price/CashFlow multiple a rational investor would assign to the company?

    – aagold

  3. September 28, 2011 at 8:58 am | Permalink

    Listen to the YouTube videos that I included and you will learn about the resources and exploration potential. It talks about how La Negra has a very long mine life. It also mentions what they have in NI 43-101 for Shafter mine. I included these videos for a reason.

  4. September 28, 2011 at 9:12 am | Permalink

    I just realized that I said “Listen to the videos.” I mean “Listen to the videos and radio interviews.”

  5. September 28, 2011 at 9:52 am | Permalink

    If there are lots of other things out there just as interesting, then you should be investing in them. The problem right now is not finding good deals but picking the ones that you like the most. The number of deals is overwhelming.

    • aagold's Gravatar aagold
      September 28, 2011 at 11:25 am | Permalink

      Ok, on that topic: you’ve recommended several of these precious metal companies on your website: YNGFF, ISVLF, MMTMF, and now AUNFF. How would your rank these 4 companies, in terms of most-undervalued to least-undervalued, as of today’s market price?

      • September 28, 2011 at 11:42 am | Permalink

        This question is hard because I love them all and I am buying every single one of them as I am writing this comment. With that being said, let me try.

        1. MMTMF – It is massively undervalued based on today’s production.
        2. AUNFF – It is massively undervalued based on Shafter put into production. But they have to put it into production which has some risk
        3. YNGFF
        4. ISVLF – It is growing but it is not as cheap as Aurcana and it won’t grow as fast.

        Why not just buy a basket of them.

        • aagold's Gravatar aagold
          September 28, 2011 at 12:08 pm | Permalink

          Do you place any importance on which exchange the company’s stock trades on? I know YNGFF trades on a “real” exchange in Canada, under the symbol YNG.TO (TSX). That makes me more comfortable with it, since the exchange enforces financial reporting and auditing requirements. I believe the other three are all listed on the “Venture” exchange in Canada which, as the name implies, is for startup companies that are inherently riskier. What do you think?

          • September 28, 2011 at 12:13 pm | Permalink

            Not really. It makes them much more volatile. Let’s not forget that Aurcana and Impact are working on getting listed on higher exchanges. For Aurcana this could happen any day now. They applied for the listing sometime around June 2011. Impact should get the listing early next year.

  6. MG's Gravatar MG
    September 28, 2011 at 10:49 am | Permalink

    Sprott siged a term sheet and the silver in question is 830,000 oz.AUN receive 25 million dollars and the payback on the silver assures AUN the $19 level as insurance.

    Good piece and well done.

    The CEO/Prez/ and VP consistently state a third project is to be added to the company’s production profile.

    If AUN double the production at Shafter as they have done at La Negra,AUN will be a 10 million oz producer.With the third production acquistion AUN enters the elite producer realm.

  7. September 28, 2011 at 11:12 am | Permalink

    Thank you for your comment on the Sprott vs Aurcana situation.

    Yes I can totally see Aurcana producing 10 million ounces of silver in the future. When you cash flow a lot, then you have options. Cash creates more cash.

    Also the beautiful thing about Aurcana is that La Negra is cash flowing nicely at the current silver prices.

  8. MG's Gravatar MG
    September 28, 2011 at 11:32 am | Permalink


    AUN can produce ten million oz Ag Eq if AUN doubles the production at Shafter as they doubled La Negra’s production.

    At that level they are ranked 19th of silver producers in the world.

    AUN’s staff are mine builders.

    AUN will acquire a third project and at that point in time AUN will potentially vault themselves into the elite silver producer category-world wide.

    • aagold's Gravatar aagold
      September 28, 2011 at 12:26 pm | Permalink

      What about corporate governance issues for these 4 precious metals mining companies: YNGFF, ISVLF, MMTMF, and AUNFF? The issue I’m most concerned about is dilution. Who’s on the board of directors of these companies? Are they managed in a shareholder-friendly fashion, or do they tend to dilute in order to grow, even when the stock price is extremely low? What about stock options – are they granted very liberally to the company executives? I’m invested in two Canadian oil/gas companies that trade on the Venture exchange (TOL.V, SPI.V), and these have gotten absolutely crushed; I think it’s because the market knows they’re going to dilute again in the near term.

  9. MG's Gravatar MG
    September 28, 2011 at 12:46 pm | Permalink


    I have no idea about any of the companies you wish to include in the discussion here on AUN/AUNFF.

    The dilution or capital structure is complete on Aurcana.The CEO and Pres has stated and reiterated this in their presentation here: M

    At the base case of $30 silver AUN are generating 100 million dollars a year.$40 silver is 200 million dollars per year-without the third acquisition pending.

    You obviously know that hundreds of millions in cash flow means dividends,growth of assets and cahsflow and less dilution,not more.

  10. September 28, 2011 at 12:50 pm | Permalink

    Why do companies dilute? Because they are desperate for money. I don’t know the situation with TOL.V or SPI.V but I guess that they needed money. Let’s take a look at our companies.

    YNGFF – It just raised money from the Deutsche Bank. Now it has enough money to fix the plant and get back to producing 150k. After this they will have a lot of cash flow. In the past, they diluted shareholders because they would have gone bankrupt if they didn’t. Also diluting shareholders is not all bad. If at the beginning, the European investors allowed the company to raise enough money, we would not be having our problems today. But they cried like little girls against dilution and they got they got burned.

    ISVLF – The company is very profitable. Why dilute? They only raised some money recently because of the tremendous potential from growing. In the past, they mainly grew internally. The CEO is very frugal.

    MMTMF – Cash flowing about $50 plus another $50 million in the bank. Why dilute? They might do a bit for the most recent acquisition they are working on. But then you are getting value from whatever you are buying.

    AUNFF – They just raised $85 million in December to put Shafter into production. They will probably need a little bit more to complete it. Let’s say they raise $20 million. This is 10 percent dilution. Big deal. Then they will cash flow $200 million.

    All the issues that you listen come down to one thing – CEO and management. Can I trust them? You have to answer this for yourself. I am not going to convince you to trust them.

    • aagold's Gravatar aagold
      September 28, 2011 at 2:02 pm | Permalink

      I agree with what you said – it really is about trust and the integrity of management. I’ll need to study the individuals more for these particular companies, but one thing is clear to me: these junior mining/oil/gas companies issue new shares far more often than I’m used to with my typical value investments. Now I agree with you that dilution is *not* always bad – it makes good financial sense if you’re getting more than you’re giving up (as Buffett puts it). But often times there’s a disconnect between what’s in the management’s best interests versus what’s in the investor’s best interests. For example, management doesn’t care too much about issuing new shares to raise funds when they can also issue themselves new stock options – in that sense it’s not really dilutive to them personally.

  11. MG's Gravatar MG
    September 28, 2011 at 1:05 pm | Permalink


    La Negra is cash flowing 20 million per year-net.In pocket-before the 33% upgrade in production at LN is completed in January 2012.

    As the CEO just stated ten days ago-the AUN capital structure is complete.

    Shafter is half way constructed.

    AUN have 18 million cash on hand and 50 million dollars in wa
    rrants that can be exercised.The total cash needed was $45 million for Shafter as per the feasibility.

    No cash needed.No further dilution.Capital structure is complete.

  12. bob's Gravatar bob
    September 28, 2011 at 3:25 pm | Permalink

    is there any material reason outside of the gold price drop for the massive sudden drop in yukon nevada gold – i don’t see any releases from the company so far.

  13. AR's Gravatar AR
    September 28, 2011 at 5:40 pm | Permalink

    Mariusz, I know at one point a few weeks ago you stated that 40% of your portfolio was in a variety of jr gold/silver miners. With your recent buying I would presume that you are now close to 50%+ in these miners.

    I agree with your conviction on these stocks, but am curious to hear how you think the stocks — as well as the precious metals themselves — will perform if an extended deflationary environment rears its ugly head. If you go back and look at the Great Depression, for example, gold performed well but at that time it was tied to the dollar so it is far from an apples-to-apples comparison to today’s world. I suspect gold and silver would crash along with other commodities in a deflation.

    As you know, these miners are highly leveraged to the prices of silver and gold — that is, if the precious metals prices rise, the miners profits rise far more. But the leverage cuts both ways and if PM prices fall hard then these stocks would presumably get demolished if only for a few months.

    Do you agree with this and if so have you put on any sort of hedges?

  14. September 28, 2011 at 6:25 pm | Permalink

    My portfolio is in the miners is now over 50%.

    It is very hard to say how the metal will perform in the deflationary environment. You can listen to a lot of experts and you will get different opinions. I look at it like this:

    I want to own miners that have very low cost basis in comparison to the competitors so that if the price of gold and silver were to decline, they will be the last ones to lose money. But before this happens other mining companies will shut down, cutting the supply of metal.

    Monument Mining is a perfect example. Their cash cost is about $300 per ounce of gold. If the price of gold stays at $1,600, they will be making a killing. If the price of gold goes to $1,000, they will still be making a killing. Before Monuments starts losing money, the price of gold would have to drop to $500. Before this would happen, many of the mining companies would have to close down.

    I think you will enjoy this interview: Rick Rule Gold Equities Set to Outperform – All Fundamentals Now in Alignment

  15. jjw's Gravatar jjw
    September 29, 2011 at 1:03 pm | Permalink

    thoughts on MMYs annual results published today? Trading at 2x revenue, 3.5x earnings… cheap!

  16. aagold's Gravatar aagold
    September 29, 2011 at 1:06 pm | Permalink

    YNG is hardly a low cost producer, right? My impression is that the mining operation at Jerrit Canyon was put out of production when the price of gold was much lower. It’s only because the price of gold went up so much that it’s being restarted, right? Any idea what the cost per ounce of gold is for a major mining company such as FCX?

  17. September 29, 2011 at 1:06 pm | Permalink

    What can I say? Next year they will double earnings and it will be trading at 1 times earnings. This is madness.

  18. September 29, 2011 at 1:15 pm | Permalink


    I am not trying to be mean but you are exhausting me with your questions. I don’t know how cheap something has to get for you to realize that it is a no-brainer. I am buying Yukon so fast right now that I cannot type fast enough.

    I don’t think you should invest in any of these miners.

    • aagold's Gravatar aagold
      September 29, 2011 at 1:25 pm | Permalink

      Sorry, I admit I’ve asked you a ton of questions, and you have been good enough to answer most of them. So I won’t ask any more…. at least until I’ve done more of my own homework and I have something more useful to add to the conversation.

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